Why Adtran Remains 20% Undervalued on Long-Term Pricing Strength

NEW YORK (TheStreet) -- Adtran  (ADTN) stock has been under pressure for most of 2014. This has never made sense to me.

With the stock closing Thursday at $23.14, the manufacturer and seller of networking and communications equipment has lost roughly 14% of its value year to date and is 7% away from a new 52-week low. But Wall Street has this story wrong. Although carrier spending still remains a question mark, management continues to make moves to diversify the business to compete more effectively and spur long-term growth.

Adtran has emerged as one of the better operating companies within the telecom space. Given the company's mix of equipment, communication services, and pricing strength, these shares should reach $28 (up 20%) by the end of the year.

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Adtran's deal with Nokia (NOK) to acquire the fixed-line Broadband Access business (Nokia Network and Solutions (NSN)) was the most recent example of the company's aggressiveness. Not wasting any time, management has already expanded its dealer base to 70 new partners to capitalize on growth opportunities.

Adtran, which competes against the likes of Cisco (CSCO) and Ciena (CIEN), is now using its supply chain advantages to build its portfolio of products to advance NSN, especially in international markets.

To the extent management can leverage NSN to grow Adtran's position in international markets, the company would have removed one layer of a disadvantage it might have had against Cisco. For that matter, despite Cisco's aggressive price cuts in the past couple of quarters, Adtran's margins have remained solid.

All told, Adtran management, whose goals have always centered on empowering their customers and partners, has exceeded all expectations in terms of revenue and profits. And the moment carriers like Verizon (VZ) and AT&T (T) stop starving themselves and reinvest capital back into their infrastructure, Adtraan's stock will trend higher.

The company is well positioned both in the U.S. and abroad, to seize a nice chunk of the expected demand in carrier volume for things like mobile broadband infrastructure upgrades.

While Cisco and Ciena won't make these slam-dunk deals to win, Adtran's heightened global presence becomes an attractive quality that will help Verizon and AT&T achieve their service delivery needs. At the same time, Adtran will be able to offer a wider portfolio of services at more competitive rates.

This is one of the reasons Adtran's management has been actively buying back its stock. They see the company's potential and believe its stock is undervalued given the company's growth potential.

As of May, Adtran's current buyback program had 1.2 million shares left to be repurchased. The board has since authorized an additional 5 million shares for a total of 6.2 million shares. The company is committed to returning value back to shareholders.

Adtran will report second-quarter earnings on Tuesday. Wall Street will be looking for 25 cents in earnings per share on revenue of $176 million, which would represent 8.5% year-over-year revenue growth. With earnings projected to grow roughly 50% year over year, those on the sidelines should take advantage of how wrong Wall Street has gotten this story.

At the time of publication, the author held no position in any of the stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates ADTRAN INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ADTRAN INC (ADTN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and a generally disappointing performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • ADTN's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 2.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • ADTN's debt-to-equity ratio is very low at 0.05 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, ADTN has a quick ratio of 2.26, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for ADTRAN INC is rather high; currently it is at 55.35%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, ADTN's net profit margin of 6.53% significantly trails the industry average.
  • ADTN has underperformed the S&P 500 Index, declining 8.02% from its price level of one year ago. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • Net operating cash flow has significantly decreased to $9.90 million or 62.28% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

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